This weekend’s piece in Barron’s profiles the Putnam Multi-Cap Core Fund (PMYAX, Class A shares). This $500 million fund has a maximum sales charge of 5.75%, expense ratio of 1.15% and turnover of 52%. According to the article

The fund’s annual return of 15.8% over the five years […] ranks in the top 3% of its Morningstar peer group.

The prospectus benchmark for the fund is the Russell 3000® Index. One of the accessible implementations of this index is the iShares Russell 3000 ETF (IWV). Alpholio™’s calculations show that since inception in September 2010, the fund returned more than the ETF in about 88% of all rolling 12-month periods, and 100% of 24-month and 36-month periods. The mean and median outperformance over a rolling 12-month period was 4.2% and 4.9%, respectively. However, due to the use of a single reference, this simple measure does not fully adjust the fund’s risk.

To get a more accurate picture of the fund’s performance, let’s apply the Alpholio™ methodology which constructs a dynamic reference portfolio of ETFs for the fund. In one variant of this patented methodology, the reference portfolio has fixed membership but variable weights of member ETFs, which allows for a better tracking of the analyzed fund. Here is the resulting chart of cumulative RealAlpha™ for the Putnam Multi-Cap Core:

Cumulative RealAlpha™ for Putnam Multi-Cap Core Fund (PMYAX)

Since inception, the fund generated about 4.4% of the regular and 3.9% of the lag annualized discounted RealAlpha™ (to learn more about these measures, please visit our FAQ). However, since early 2014 the cumulative RealAlpha™ for the fund has been largely flat or, most recently, decreasing. At 13.7%, the standard deviation of the fund was approximately 0.8% higher than that of its reference portfolio. The RealBeta™ of the fund, measured against an ETF tracking the broad equity market as opposed to just a large-cap index, was around 1.08.

The following chart shows fluctuations of ETF weights in the reference portfolio over the same analysis period:

Reference Weights for Putnam Multi-Cap Core Fund (PMYAX)

The fund has top equivalent positions in the Vanguard Value ETF (VTV; average weight of 35.4%), Fidelity Nasdaq Composite ETF (ONEQ; 18.9%), iShares Morningstar Mid-Cap ETF (JKG; 10.8%), Vanguard Industrials ETF (VIS; 7.3%), Vanguard Financials ETF (VFH; 6.5%), and Vanguard Materials ETF (VAW; 5.7%). The Other component in the chart collectively represents additional six ETFs with smaller average weights. One of those ETFs, the iShares Morningstar Large-Cap Value ETF (JKF), spiked as high as 63% at the turn of 2011. Hence the notch in the main ETF weights at that time, which also coincided with a significant increase in RealAlpha™ (see the first chart).

Since inception, the Putnam Multi-Cap Core Fund added a significant amount of value on a truly risk-adjusted basis. However, this value drastically diminished when the fund’s steep front-load was taken into account: the annualized 5-year return of the fund through September 30, 2015 was just 13.83% (compared to 15.19% before the sales charge) versus 13.28% of its benchmark.

The article states that

In the past year, [the] fund has underperformed; its total return of 3% trails nearly 80% of its peers.

This is also reflected in the decline of the cumulative RealAlpha™ over the last quarter. It remains to be seen whether the fund’s performance rebounds in the future, especially given the manager’s plan to reduce the number of holdings from the current number of well over 300.

To learn more about the Putnam Multi-Cap Core and other mutual funds, please register on our website.

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